Record 2007 Gold Demand Tarnished By Q4 Drop

February 13, 2008byJCK Magazine

A steady annual increase in overall identifiable gold tonnage demand, coupled with a gold price racing towards the long-held $850 ounce record, combined to make dollar demand for gold hit a record $79 billion in 2007, the World Gold Council said Wednesday.

WGC’s Gold Demand Trends, said that gold demand was 4 percent higher in 2007 than in 2006 at 3,547 tons.

In China, total consumer demand reached 326 tons, 26 percent above 2006 levels. China has now overtaken the U.S. as the second largest volume retail market for gold jewelry after India, with demand for jewelry reaching 302 tons and surpassing 300 tons for the first time since 1997.

In Turkey, 2007 brought record overall demand for gold. Jewelry demand was at 188 tons, the second highest annual figure ever, up 14 percent on 2006. Net retail investment demand was up 2 percent on 2006 at 61 tons.

Strong growth continued in Russia with jewelry demand rising 11 percent to set a further annual record. Growth remained vibrant throughout the year with demand in the fourth quarter nearly 25 percent higher than a year earlier—making Russia the fastest growing country for the quarter.

High and volatile gold prices had a major impact on the fourth quarter, however, with identifiable demand falling by 17 percent in tonnage terms from year-earlier levels. The figures, compiled independently for WGC by GFMS Limited, show this trend was most keenly felt in India, the world’s largest and also most price sensitive gold market, where demand fell 64 percent on year earlier levels, following 40 percent growth in the first three quarters.

The U.S. was also negatively impacted with a combination of a weak economy, poor retail environment, and record prices denting jewelry demand which stood 14 percent down on 2006 figures.

“It would appear that an ‘affordability’ mark has been reached in certain lower value segments of the market, although time will tell whether this will be overcome, WGC said.

In the investment sector, the fourth quarter of 2007 saw record levels of inflows at $8 billion, the highest quarterly level in recent years, WGC said. This was characterized by strong buying in the “inferred investment” category. This sector includes over the counter transactions in spot gold and changes in stocks backing futures and other derivative transactions. Net retail investment, in the form of bars and coins was up 2 percent year over year in 2007, but the last quarter was heavily impacted by price movements as investors took profits.

Net retail investment in the fourth quarter at 67 tons was 39 percent lower than the fourth quarter of 2006. After record inflows into gold exchange traded funds in the third quarter of 2007(139 tons), demand fell back to 78 tons for the last quarter. Total ETF demand was 251 tons for the year, 4 percent lower than 2006 levels. Overall identifiable dollar investment demand was up 15 percent on 2006 levels. Industrial demand reached a record 465 tons in 2007, up 2 percent in 2006. Demand for the fourth quarter meanwhile, was up 2 percent year-over-year at 77.4 tons.

“On a yearly basis we have a seen a four percent tonnage rise in identifiable demand for gold and record levels of demand in dollar terms, which is pleasing,” said James Burton, World Gold Council chief executive officer. “However high and volatile gold prices in recent months have meant we have now entered a period of challenging trading conditions in the gold market, which have heavily impacted consumer demand for gold especially in the jewelry and retail investment sectors.”

Gold supply remained tight throughout 2007, falling back 3 percent in tonnage terms. Supply from the official sector rose due to higher Central Bank Gold Agreement sales, but this was offset by increased de-hedging by gold mining companies and lower scrap supplies.

“Jewelry and retail investment demand is unlikely to be strong in the first quarter of 2008,” Burton added. “However gold’s desirability to consumers and investors alike remains very strong and once prices stabilize we believe buyers will come back to the market.”